Closet Indexers Will Go the Way of the Buggy and the Whip

“The decade long run of money moving out of actively managed mutual funds in favor of passive indexes and exchange-traded products speaks volumes about investors’ palate for active management these days,” according to a recent article in Investment News. The piece touches on how to identify active managers who are not simply hugging the benchmark in an overly cautious effort not to get beat by it.  The key is to be selective, according to the article, but this can be challenging due to the large number of funds and fund classes available.  Professor Martijn Cremers of Notre Dame says benchmark-huggers virtually guarantee failure, saying “The more holdings a fund has that are different from the benchmark, the more potential the fund has for performance that is different from that benchmark.” Cremers launched a website aimed at uncovering the most active of active managers, using a simple equation dividing the funds expense ratio by the index overlap. President of Touchstone Investment, Steve Graziano, is critical of benchmark huggers that are charging active-management fees. “We manage active funds because you have to be different from the benchmark in order to survive… We’re right at the intersection of where closet indexers will go the way of the buggy and the whip.”